26.01.202618:30:17UTC+00Brazilian Real Tests May 2024 Highs

The Brazilian real has strengthened beyond 5.33 against the US dollar, reaching its most robust level since May 2024, driven by ongoing foreign investments and a significant interest rate gap. The decline of the US dollar has boosted demand for Brazilian assets, with non-residents contributing approximately R$7.7 billion last week, and inflows for January approaching R$12.4 billion, increasing the demand for reais via domestic bond markets. The Selic rate, firmly positioned at 15%, continues to anchor support, with expectations for the first rate cut not anticipated until March, which preserves competitively high real yields and sustains carry trade flows. Additionally, external dynamics have played a favorable role; a strong trade performance in December and foreign direct investment more than compensating for the 2025 current account deficit have alleviated immediate FX funding demands. On the fiscal side, record tax revenues amounting to R$2.89 trillion in 2025 have enhanced short-term cash flow outlooks and eased urgent financing pressures, bolstering the real's vigor despite ongoing fiscal challenges.